Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
OECD raises Korea's growth forecast to 2.8%, inflation outlook to 5.2%
Officials from the Organization for Economic Cooperation and Development (OECD), the Ministry of Economy and Finance, the Bank of Korea and state-run Korea Development Institute (KDI) pose during a forum at KDI headquarters in Sejong, Monday, to mark the release of OECD's updated report on the Korean economy. Courtesy of Ministry of Economy and Finance
By Yi Whan-woo
By Yi Whan-woo
The Organization for Economic Cooperation and Development (OECD) raised its economic growth outlook for Korea to 2.8 percent, Monday, from 2.7 percent in its previous forecast in early June, citing the country's effective handling of the COVID-19 pandemic and a recovery in consumer spending. Asia's fourth-largest economy grew 0.7 percent in the second quarter.
Still, the Paris-headquartered organization warned that the pace of economic recovery will grow slower due to risks from within Korea and abroad, such as the Ukraine crisis, soaring inflation and high household debt.
It accordingly lowered its 2023 economic growth outlook for Korea to 2.2 percent from 2.5 percent in an updated report on the country titled, “OECD Economic Surveys: Korea 2022.” The Bank of Korea forecast the country's economy to grow 2.6 percent this year and 2.1 percent in 2023.
The forecast for inflation was revised up from 4.8 percent to 5.2 percent for this year, and from 2.3 percent to 2.4 percent for 2023.
“The recovery will continue, albeit at a slower pace,” the report read, noting it is helped by the Yoon Suk-yeol government's additional fiscal stimulus, worth nearly 62 trillion won, to spur the growth of the pandemic-stricken economy.
The report went onto say that Russia's invasion of Ukraine is “weighing on economic activity and exposes supply chain dependencies,” although Korea is less directly exposed than many OECD peers.
The OECD pointed out that export-reliant Korea depends on Ukraine and Russia for raw materials to produce semiconductors, one of its key export items, saying such a fact “highlights the need for resilience and diversification in the sourcing of key inputs for industry.”
The organization assessed that the “lifting of practically all restrictions set the stage for consumption in contact-intensive services to recover from late spring,” but such a recovery is being dragged down by inflation.
Although inflation in Korea slowed for the first time in seven months to 5.7 percent in August, the OECD viewed it still remained “almost triple the 2 percent inflation target.”
It also said household debt, which amounts to a record 1,869.4 trillion won ($1.33 trillion) in the second quarter, is “an increasing vulnerability in a period of high inflation and monetary policy tightening.”
“Many small and medium-sized companies in contact-intensive services, still weak from the pandemic and sensitive to eroding purchasing power, continue to be propped up by government support, while inflationary pressures and rapid population aging call for fiscal restraint,” it noted.
The organization said the Bank of Korea's (BOK) monetary tightening policy since August 2021 has been “a timely response,” noting it has helped “to keep inflation expectations anchored.”
It forecast Korea's fiscal balance will post a deficit of 0.1 percent of gross domestic product (GDP) in 2022, but turn to a surplus of 0.6 percent next year.
On Korea's green transition, the OECD said the Yoon administration's return to a nuclear energy policy “improves the chances of target achievement and may reduce costs compared to previous plans to phase out nuclear and coal in parallel.”
“But so far, like in most countries, it has proven challenging to agree on a location for such a permanent disposal facility due to local resistance,” it added.
To reach greenhouse gas emission targets, the OECD suggested comprehensively reviewing the institutional framework hindering the carbon price from passing through and holding back emission reductions in the electricity sector.